Friday, November 6, 2009

GLD vs. physical gold

The Exchange-Traded Fund (ETF) GLD has been a popular vehicle for investors interested in participating in gold price appreciation--and as a hedge against inflation and financial crisis. But there is a potential downside, as previous mentioned. According to James Turk:

“For now, gold is marching to a different drummer,” says Mr Turk. “We are seeing a scramble for physical metal, and that demand is driving gold higher. Buyers are opting for physical gold, not paper gold.”

He points out that when gold was trading at $870 an ounce back in early April, the SPDR Gold Trust – the world’s largest gold exchange-traded fund – recorded ownership of 1,127 tonnes of the metal. Since then, SPDR’s holding has shrunk by 20 tonnes, but gold has climbed by more than $200. “It is a clear example that buyers want physical gold and not paper gold. They are opting for the real thing, not a substitute.

“Why? Because risk aversion has returned to centre stage as worries about bank solvency have resurfaced. It is possible we have been in the eye of the hurricane. Physical gold does not have counterparty risk, which makes it the safest haven of all.”

With a shortage of physical gold, many doubt the gold paper certificates are actually backed by physical inventory, with matching serial numbers.

Of course, there are disadvantages of owning physical gold--especially with bullion, including safe storage and security. But in times of extreme financial crisis, claiming that physical gold may be difficult--if it doesn't exist.

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